SWBI - NASDAQ

Good day, everyone, and welcome to Smith & Wesson Brands, Inc. First Quarter Fiscal 2026 Financial Results Conference Call. This call is being recorded. At this time, I would like to turn the call over to Kevin Alden Maxwell, Smith & Wesson's General Counsel, who will give us some information about today's call.

Thank you, and good afternoon. Our comments today may contain forward-looking statements. Our use of the words anticipate, project, estimate, expect, intend, believe, and other similar expressions are intended to identify forward-looking statements. Forward-looking statements may also include statements on topics such as our product development, objectives, strategies, market share, demand, consumer preferences, inventory conditions for our products, growth opportunities and trends, and industry conditions in general. Forward-looking statements represent our current judgment about the future and are subject to risks and uncertainties that could cause our actual results to differ materially from those expressed or implied by our statements today. These risks and uncertainties are described in our SEC filings which are available on our website along with a replay of today's call. We have no obligation to update forward-looking statements. We reference certain non-GAAP financial results. Our non-GAAP financial results exclude relocation expense. Reconciliations of GAAP financial measures to non-GAAP financial measures can be found in our SEC filings in today's earnings press release each of which is available on our website. Also, when we reference EPS, we are always referencing fully diluted EPS. And any reference to EBITDA is to adjusted EBITDA. Before I hand the call over to our speakers, I would like to remind you that when we discuss mix results, we are referring to adjusted NICS, a metric by the National Shooting Sports Foundation based on FBI NICS data. Adjusted NICS removes those background checks conducted for purposes other than firearms purchases. Adjusted NICS is generally considered the best available proxy for consumer firearm demand at the retail counter. Because we transfer firearms only to law enforcement agencies, and federally licensed distributors and retailers, and not to end consumers mix generally does not directly correlate to our shipments or market share in any given time period, we believe mostly due to inventory levels in the channel. Joining us on today's call are Mark Peter Smith, our President and CEO, and Deana L. McPherson, our CFO. With that, I will turn the call over to Mark.

Thank you, Kevin, and thanks, everyone, for joining us today. First quarter results came in better than expected, with sales of $85.1 million and EBITDA of $8 million. Reflecting robust demand for our new products and continued strong market share for our broader portfolio in every firearms category in which we compete. Our performance during the seasonal slow period for firearms demonstrates the strength of our brand and the ongoing success of our innovation strategy. During the first quarter, our performance in handguns was exceptional. With our shipments into the sporting goods channel increasing just over 35% year on year, versus NICS being down 2.4%. These results were driven by strength across several product lines, including Bodyguard, Shield, and M&P. Showing the power of the Smith & Wesson brand supported by our incredibly passionate and loyal customers. In long gun, our shipments into the sporting goods channel were down 28.1% year over year versus NICS being down 7.8%. However, reflects the divergent conditions between the shotgun and bolt action rifle market. Where we do not play meaningfully. And the MSR and lever action market, where we continue to maintain a very strong market position. As expected, average selling prices trended lower in the first quarter. Declining 6.1% sequentially. Handgun ASPs were down 4% while long guns declined 13% due to mix. The market remains highly promotional, our focus on new products, strong marketing campaigns, such as the red, white, and big blue campaign we ran throughout July, and continued consumer preference for our brand have allowed us to participate in promotions more selectively. As a result, we maintain relatively healthy ASPs throughout the summer. With the typically busy fall and winter seasons now upon us, we continue to expect to maintain strong ASP throughout fiscal 2026. Moving now to market conditions. We continue to view the market as relatively quote unquote normal. It remains cyclical, reflects traditional seasonality throughout the year. While the current environment is more challenging than a few years ago, as we have seen many times before during these market cycle, underlying consumer demand is above what we saw before the last surge. As we now have more consumers are participating in the category. Through all the ups and downs of the market over time, our leadership position in key categories has endured. And feedback from our distributor and retail partners supports The View that our disciplined execution of our strategy continues to position Smith & Wesson at or near the top in the categories in which we can Innovation remains a cornerstone of that strategy, with new products accounting for 37.3% of sales in the first quarter. Underscoring this, we've seen a very positive initial reception to our Shield X which we introduced in late July, And as I've said many times before, our award-winning engineering and design teams consistently deliver products that resonate with consumers. With a strong pipeline of new products upcoming, we will continue to invest in innovation to keep the line fresh and ensure that we maintain our leadership position. Looking at inventory levels in the channel, distributor inventory is very healthy. With strong sell through of our products. Inventory was down more than 13,000 units at the end July compared with the 2025. And down more than 17,000 units year over year. Which indicates strong demand for our products at the retail count. Due to this clean inventory position, we are well placed to quickly convert incremental demand into shipments as we enter the typically busy firearm season. As we now prepare for the traditionally stronger second half of the year, we remain disciplined in managing our business and our capital allocation strategy is unchanged. Invest in our business, maintain our strong balance sheet, and return value to stockholders. In fiscal 2026, our internal investments continued to prioritize leveraging our state-of-the-art facility in Tennessee, optimizing and modernizing several value add elements of our facility in Massachusetts, and investing in special initiatives to further enhance our brand and support our customers. On that note, and before I hand the call over to Deana, I want to provide an update on a very special project that the team has been hard at work on at our Tennessee facility. For decades prior to its closure several years ago, the Smith & Wesson Academy in Springfield, Massachusetts was an industry staple. Providing training for countless law enforcement officers, consumers, and agencies around the world, Today, I'm thrilled to announce that the Smith & Wesson Academy is back. Better than ever. The state-of-the-art facility encompasses nearly 30 acres of purpose-built ranges, training facilities, fitness equipment to allow training under physical duress, classrooms, and even a two-story modular building rated for simunition live fire to allow situational training for law enforcement and military The academy will be run by Mark Cociolo, a true American hero. Mark is a retired US Navy SEAL veteran and firearms training expert. After proudly serving our country for twenty-five years, including with the prestigious Seal Team Six, He spent the next thirteen years of his career as one of the top firearms instructors at basic underwater demolition SEAL training or BUDS in San Diego. Where he helped revamp the firearm training curriculum and train nearly 4,000 Navy SEAL candidates. The goal with this new facility will be to provide yet another advantage to our current and prospective law enforcement, federal agency, and military customers. Who will all have access to Mark and his team's knowledge. And our facilities free of charge. In addition, in keeping with our goal, promote responsible firearms ownership, We aim to enhance the firearms proficiency of Iloro consumers who will be able to sign up for a variety of courses custom to my custom designed any skill set from beginners to expert. And come to Smith & Wesson to learn from the best of the best. All, of course, while showcasing our world-class firearm. We'll be hosting a grand opening celebration next Friday on September 12 and are excited to share more details as we begin leveraging this amazing app. Finally, and as always, just want to thank our entire team of talented Smith & Wesson employees for their tireless dedication to our brand. And in putting their skills to work each and every day to make us successful. With that, I'll turn the call over to Deana to cover the financials.

Thanks, Mark. Net sales for our first quarter of $85.1 million were $3.3 million or 3.7% below the prior year comparable quarter. During the quarter, inventory at distributors declined by over 10% from the end of the prior quarter and over 13% compared with the July 2024 in terms of actual units. Indicating positive sell through of our products at retail and a good position for us as we look forward to the coming month. As expected, handgun ASPs declined slightly from Q4 levels due to promotions and continued strong demand for our lower priced products. Long gun ASPs decreased due to the mix of lower priced products, and lower overall volume. Gross margin of 25.91.5% below the comparable quarter last year due primarily to decreased absorption on lower production and a 120 basis point negative impact from tariffs. Stemming primarily from steel. Partially offset by lower promotion costs and lower federal excise taxes as a result of the favorable outcome of recent audit. Operating expenses of $25 million for our first quarter were $680,000 lower than the prior year comparable quarter with increases in R&D, being more than offset by lower selling and marketing costs due to lower promotional costs and the absence of costs related to the NRA show which was held in Q4 of last fiscal year. The lower revenue and associated margin, combined with an increase interest expense due to higher outstanding borrowings, resulted in a $3.4 million net loss or an 8¢ loss per share. Cash used in operations for the first quarter was $8.1 million compared with $30.8 million in the prior year comparable quarter, due to a net working capital decrease of $24 million Inventory increased $13.3 million during the current quarter versus $29.3 million in the prior year comparable quarter. As a reminder, typically level load our factories and build inventory in our first quarter. We spent $4.3 million on capital projects this quarter, compared with $4.7 million in the prior year comparable quarter and expect our capital spending for the year to be between $25 million and $30 million We paid $5.9 million in dividends and ended the quarter with $21 million in cash and investments and $95 million in borrowings on our line of credit. Finally, our board has authorized our 13¢ quarterly dividend to be paid to stockholders of record on September 18, payment to be made on October 2. Looking forward to our second quarter, we expect a normal seasonal environment causing our second fiscal quarter sales to grow significantly over the first quarter and to land roughly at 3% to 5% below our Q2 fiscal 2025. So channel inventory at healthy levels, we don't expect inventory to have an impact positively or negatively on our second quarter. Although we remain cautious regarding the full fiscal year, due to macroeconomic conditions, we believe that our current product lineup and planned new product introductions will allow us to maintain or expand our market share in the foreseeable future. With the extended shutdown in August that we discussed last quarter resulting in lower absorption, combined with the impact of steel tariffs, we expect Q2 gross margin to be in line with Q1 gross margin. Operating expenses in Q2 will likely be 20% higher than Q1 with half of that increase driven by profit sharing. In addition, costs associated with the grand opening of the Smith & Wesson Academy combined with promotions, sales activity, and distribution costs associated with the increased volume will make up the remainder of the increase. Our effective tax rate is expected to be approximately 33%. With that, operator, can we please open the call to questions from our analysts?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star key. One moment, while we poll for question. Thank you. Our first question comes from the line of Mark Eric Smith with Lake Street Capital. Please proceed with your question.

Hi, guys. I wanted to ask first about ASPs, kind of both in in handgun and long gun. Just just given kind of the competitive dynamics, but but more so kind of where the consumer is You know, how do you feel about your your pricing today on products? And and do you feel there's there's any shifting that that potentially could happen as we look through the rest of the year?

Hey, Mark. Yeah. The We are pretty pleased with the AFPs. Throughout the summer, as you know you know, that's our typically slow season you know, throughout the year in in firearms. And, you know, we were we were able to kinda maintain that. You know, the promotional environment still remains fairly robust out there. But for us, as I said in the in the prepared remarks, you know, with the the innovation making up a a significant portion of our of our pipeline of of products. And the strength of the, you know, even the core portfolio, you know, we were able to be pretty selective. We did participate, but, you know, you know, we are able to maintain those ASPs. And as we now, you know, go into the busy season, I think that bodes pretty well for us to to be able to hold those up throughout the rest of the year. K. And and then I I wanted to ask about the long term business. You talked about some markets where you don't really participate or have products. You know, what opportunities do you have in in expanding your your product offerings maybe to hit some of these these segments?

Yeah. I mean, I think we've been well, we have definitely been very successful with the 1854, know, entering into that lever action market. I think that's kinda paved the way for us to, you know, to continue expanding into more of the white space for us. In the in the in the industry that we don't play in. So, you know, we're Mary continue. We're we're still expanding that lever action platform. You know, there's you know, two more calibers that we're that we're still kinda working on on filling out. And, you know, we're those will be coming here very shortly. But, you know and then after that, it's, you know, on to the next thing. Perfect. And the last one for me is just as we look out to to changes in regulations with the recent tax law, it's is there opportunities for some NFA items potentially suppressors and SBRs offer some higher demand as as we move into January.

Yeah. Good question. For sure. You know, I think there's a lot of pent up demand there in the suppressor market. As folks are, you know, kind of waiting for the for the that law to go in the go into effect in January. So, you know, I think in a you know, from a long term perspective, bodes very well for us. With the with the Gemtek brand. So, you know, we're already seeing some some movement there with some promotions on, you know, for a early discounts and and on on the text. Fact stamp promos that we're running with some of our some of our fire or sorry. Sorry. Our suppressor retailers and, you know, I think that's an early indication that know, that that should be pretty healthy market come January. Excellent. Thank you.

Yep. Our next question comes from the line of Matthew Joseph Raab on for Steve Dyer Craig Hallum. Please proceed with your question.

Hey. Thanks. This is Matthew Raab on for Steve. Just wanna hone in on the legacy products. On on my math, legacy products were actually up very slightly year over year in the quarter. I guess, you know, two two sort of questions there. One, what do you credit the better performance to in the quarter? And then two, how do you feel about getting through the rest of that inventory as we look towards the the back half of the year?

Thanks, Matthew. Yeah. The, the the legacy product did very well for us. You know, we continue to gain share there. I think, you know, that the the combination of, you know, the strength of the brand you know, we're we are definitely taking share in that in that category. Of the more in line, you know, products, you know, excluding the new stuff. And we continue to see that, you know, that we we have some more runway there to go as we go through the rest of the year. And then from an from an inventory perspective, you know, we're hyper focused on that this year and kind of, you bringing our internal inventories kind of back down again, you know, just to be completely honest, we ended last year with maybe a little bit more than we wanted. And, you know, with that, I'll just remind you that, you know, for us in the firearms industry, that's not necessarily a concern. We obviously a strong balance sheet, and, you know, we're we're able to we're able to kinda navigate the ups and downs of the of the pretty well. I think we've proven over time and and, you know, for us now, that just means you know, again, these products, there's no expiration date on on on our inventory and just make some adjustments to the production run rate and and bring that down throughout throughout year.

Sure. That's that's great. And then just just on promos, really thinking about the back half of the year, we expect Promac promo activity to accelerate to aid the inventory reductions, or should we expect promos to remain pretty pretty rational? And then maybe comparing that cadence to to last year would be would be helpful. I mean, it sounds like you're being pretty thoughtful about promos in the near term, but but any other thoughts there would be would be great.

Yeah. On the promotional side, I you know, I don't foresee any need for us to, you know, be you know, leaning in there any more than we already have throughout this summer. As I mentioned, you know, we are we are participating. We're you know, we're just doing a very thoughtful manner. You know, we're a lot of conversations internally about, you know, maybe a couple pockets here and there where we wanna, you know, promote. But, you know, I I think you can kind of expect that our ASPs will, you know, kinda hold up throughout the rest of the year. You know, we'll we'll participate, but, you know, I think we're we're probably in a little bit better position just given the strength of the brand and, you know, again, strong balance sheet where we can kinda be a little bit more measured and and in in our participation. So know, we'll participate, but I don't think you know, you you shouldn't expect that, you know, we're gonna have a significant increase as go through the back half.

Okay. That's great. Thank you very much.

Thank you. And we have reached the end of the question and answer and I would like to turn the floor back to Mark Peter Smith for closing remarks.

Thank you, operator, and thanks, everyone, for joining us today. And your interest in our company. We look forward to speaking with everybody again next quarter.